I can’t be the only person, surely, to have played Desert Island Discs in their head? It’s the BBC radio show in which you select your all-time top 8 tracks but then have to choose the single track to rescue if the waves came crashing in. It’s quite a leap from that to metrics, but I am often asked, ‘Which are the most important metrics?’, ‘How do you avoid paralysis by analysis?’, and ‘How are these really linked to scaling-up revenue and profitability?’.
Ideally one wants a ‘leading’ indicator, i.e. something that tells you about the health of the business in advance of the financial actuals. I’ve used user digital engagement and must-have scores. Both are useful; both have limitations. Engagement or usage may not correlate with ‘value created by the user’, as a client might ‘seal a deal’ for themselves with only infrequent use of your data or insights. That said, I’d usually prefer a business with strong digital usage over weak as the insight and relationships gained should help to build barriers to entry. Must-have scores, and the surrounding conversations that customer success-type roles can have with users, can provide a highly useful stream of product and service feedback. However, they are often based on too small (or too friendly !) a sample from within one organisation, or across your portfolio of clients, to tell you about the health of your overall business.
So, I use a blend of metrics but, if I really had to save only one from the waves, I want to make the case for the true north of retention. Yes, it’s financial, but you can do it on a rolling basis in real time. It can be applied to most businesses, certainly Events, Publishing/Marketing Services and Subscriptions. Moreover, its fundamental economics, and the role that plays in scaling-up, is under-appreciated.
Business A is beyond start-up but hasn’t scaled up; it generates £1m from 50 clients, each paying roughly £20k. Over a time period (this year vs last year, rolling 12-month basis, or year-to-date etc), it loses 15 clients and £300k in churn. The remaining 35 clients renew, spending £22k each or £770k in total. The core, acid-test renewal metrics for me are:
- a Volume Renewal Rate of 70% (35/50)
- an Account Uplift on those that renew of 10% (either £22k/20k or £770k/700k)
- an overall Value Renewal Rate of 77% (£770k/1000k)
Despite what might appear decent Account Uplift, this business is most likely scaling-down not scaling-up. Its £1m has turned into £770k at the end of the renewal cycle, which means it has to chase significant new biz of £230k just to stand still. So this business is going to struggle to grow and the significant new business requirement usually means extra marketing expense which reduces the profitability. The fundamental economics aren’t good: the Account Uplift on those that renew isn’t enough to offset the money lost in churn. Every business will face some churn – clients merge, go bust, shouldn’t have been sold to in the first place – but the Volume Renewal Rate needs to be higher for this business to scale-up. Even if this business does brilliantly in winning new clients so that overall revenue grows, it has an underlying issue to address which will eventually catch up with it (the mixing of renewals and new business into one metric is one of the reasons I don’t particularly favour ‘Monthly Recurring Revenue’ that some publishers and many SaaS businesses use).
There are situations where the Volume Renewal rate can be low and the business is arguably healthy (e.g. shedding a long tail of small clients) but, generally, the Volume Renewal Rate and Account Uplift (i.e. the ability to have such strong client relationships and value proposition that one can put through price increases or sell in extra products or users) tells one an awful lot about the health of, and challenges facing, a business. If you can get the Value Renewal Rate to be close to 100% or higher, your business effectively grows by the amount of new business you can generate. And your exit multiple will reflect that.
And you might say, ‘that’s all obvious’. But please then ask yourself:
- are you putting enough effort into leading the monthly review of renewals with your team? does revenue retention have the status of true north in your organisation?
- what is your team working on that is specifically aimed at improving Volume Renewal Rate or Account Uplift?
- are you letting great new business generation mask an underlying issue which will eventually catch up with you? and do you have clear answers on whether you should shift resource and money from new business to renewals?
And if you doubt what’s possible, check out The Economist – it lost a net 91k subscribers in the year to end March 2020 but, largely by a back-to-basics focus on retention under new CEO Lara Boro, added a net 90k in the year to end March 2021.
[By the way, mine would be “I Wish I Knew How It Would Feel To Be Free” by the Billy Taylor Trio !!]
Senior Adviser, Collingwood Advisory